But Amit Mor, a top Israeli energy expert who often consults for the World Bank, said Israel was unlikely to go the same way as the Netherlands. The difference, he said, is that in the Netherlands and other countries that have suffered from Dutch disease, the new revenue accounted for 20 to 30 percent of Gross Domestic Product, sometimes even more. Revenue from Israel's gas finds is likely to rise to no more than two percent of GDP by 2020, he said. "The contribution of gas sales to the economy, although important, is not going to be as significant as the high-tech or other export sectors of Israel," Mor said.
And even if gas ends up contributing a higher proportion of Israel's GDP - the "best case" scenario would be up to 10 percent, according to a source familiar with official deliberations who wished to remain anonymous due to the sensitivity of the issue - meltdown in other parts of the economy is avoidable. Norway found oil in the North Sea shortly after the Netherlands struck gas, but has been much smarter about protecting its economy. At first it limited the amount of oil produced. Later, it created a government fund to manage and invest the country's petroleum wealth. The fund's assets are currently valued at about $500 billion.
Other countries, like Chile and Azerbaijan, have copied Norway's example, leading to speculation that Israel may set up its own sovereign wealth fund. The source familiar with official thinking told Reuters that the fund option had been talked about but would not be adopted in the immediate future. "The Norwegian fund was created because of the great impact they knew it would have on the economy. It was meant to deal with a problem that was much more threatening in scope than we expect here," the source said.
CHANGING THE RULES
There's still a lot to do. The Israeli government has yet to decide how much it will tax the companies that will produce the gas. The country's law on royalties dates to 1952: written to encourage exploration, it set the royalty level on gas and oil income at 12.5 percent. That's one of the lowest rates in the world. While company taxes lift Israel's total take from commodities companies to about 32 percent, many in Israel want the royalty rate increased.
In April, the Finance Ministry formed a committee led by economist Eytan Sheshinski, an expert in public finance, to study how much the government take should be. The committee is set to deliver an interim report on Nov. 15.
Unwilling to wait for the Sheshinski committee's views, a group of government and opposition legislators have drafted a bill to raise the gas and oil royalty level to 20 percent. "In the past decade, the average government take in countries (with similar fiscal policies) increased from 49 to 53 percent, while in Israel it went down from 39 to 32 percent due to a decrease in company tax," a report by the parliamentarians said, signalling room for a hike.
Along with an increase in royalties, or perhaps in its place, one option under discussion is a progressive corporate tax that increases with revenues generated. Any final decision will have to pass a parliamentary vote.
Predictably, energy companies are furious and argue that any new tax would violate existing agreements. "I am very worried, both by the process and its essence," Delek Energy Chief Executive Gideon Tadmor told Reuters. "We came and invested on the basis of a commitment, and agreement with the government along a specific fiscal regime. To come retrospectively after the discoveries were made and the drilling succeeded, is not moral, is illegal, and not wise."
The Noble-Delek consortium says its total investment could reach $3 billion, not including the Leviathan field. Tadmor said that sort of investment could disappear if Israel changes its current terms. Its waters are tough to explore, he said, due to the lack of infrastructure, an Arab boycott scaring away many foreign energy partners and the lack of government participation.
"You need to think 10 steps ahead," Tadmor said. "You need to think of further discoveries and of safeguarding the incentives so companies come drill."
An industry insider who would not be named because of the sensitivies of the issue said politicians were acting like "Robin Hood" by trying to shower the public with wealth at the companies' expense. It could backfire, he said, because an increase to even 20 percent in royalties is "tremendous". Fields with big reserves, like Tamar, could tolerate the increase, but not smaller ones. Eventually there would be less drilling, less revenue and less wealth, he said.
Speaking for Noble at an Israeli parliamentary committee on Oct. 5, former U.S. judge Abraham Sofaer said the dispute could even be brought before the International Court of Justice. "The U.S. government will have to decide whether to act on behalf of Noble in order to receive full compensation for the damages caused to it," a committee spokesman quoted Sofaer as saying. "I don't need to tell you what a tragedy it will be if two allies like the U.S. and Israel will have to resolve disagreements in a European court."
Finance Minister Yuval Steinitz dismissed the idea last month, pointing out that countless countries have changed government policies on royalties in the past. Just three years ago, the Canadian province of Alberta hiked its royalty rate. The year before that, Alaska pushed up taxes on oil companies and China adopted a windfall tax on oil.
"No court in Israel or in the world will say to the government of Israel that it can't do what was done in the United States or in Great Britain," he said.
In a letter to Steinitz seen by Reuters, Marc Sievers, charge d'affaires at the U.S. embassy in Tel Aviv, said the possibility that the Sheshinski committee will recommend a retroactive change "undermines confidence in the stability of Israeli fiscal policy and creates barriers to international investment.
"I urge you to take these concerns into account and, at the very least, to limit - publicly and in writing - application of the committee's recommendation to future leases and licenses," Sievers wrote. A spokesman for the embassy would not comment on the letter, which did not mention any steps the United States might take.
Still, raising taxes on resource companies is popular with the Israeli public, and many lawmakers say they will not be swayed. One sponsor of the bill, Shelly Yacimovich, in an open letter to the media accused Delek owner Tshuva, Delek Energy Chief Executive Tadmor and lobbyists of blocking a similar law from being passed in 2001 and "aggressively and continuously" torpedoing efforts ever since.
At a forum in Tel Aviv last month, veteran geologist Yossi
Langotsky, considered the father of Israeli gas exploration -
the Tamar site is named after his granddaughter - declared that
Israel needed to benefit more from the discoveries. Big
companies had backed out of projects in the past, he said,
pointing to UK -based BG Group's